San Jose's Pension Reforms: A Case Study

San Jose's pension reforms can serve as a model for cities across the country, says Adam Summers, a senior policy analyst with the Reason Foundation.

Due largely to huge increases in salaries and benefits, San Jose's unfunded liabilities skyrocketed over the last decade.

Between 1991 and 2009, adjusting for inflation, the average annual benefit for police and fire retirees increased 75 percent. For other retired city workers, benefits increased by 54 percent.

From 2003 to today, San Jose saw its unfunded liability for post-employment benefits increase from $300 million to more than $4 billion.

Of that, $2.3 billion was for pensions and $1.8 billion was for health care for retirees.

Notably, this increase came at the same time as a huge increase in pension contributions -- from $73 million in 2001 to $245 million in 2012.

To deal with rising costs, the city tried to cut salaries and government services, but the cuts were not large enough. Beginning in 2010, San Jose implemented a number of pension reforms.

The city changed the composition of who sat on the city's pension board. Insiders were removed and independent individuals with financial expertise were put in their place. An independent pension review board is essential to reducing internal opposition to reform measures.

Ballot measures were passed by voters, limiting compensation increases that city workers could be awarded in arbitration disputes. The city was also given the authority to put new city employees on pension plans with fewer benefits.

In 2012, San Jose gave existing city employees the choice to switch to a plan with reduced benefits or contribute more of their paycheck to their existing benefit plans.

Moreover, the city required voters to approve any benefit increases in the future.

San Jose reduced the automatic annual cost-of-living adjustment down to 1.5 percent instead of 3 percent.

Many city employees and retirees filed suit, challenging the reforms. On December 20, 2013, a Superior Court judge tentatively overturned some of the city's reforms. She did, however, uphold most of the reform initiative and the resulting savings.

One of the biggest lessons from San Jose's reform experience is effective messaging. Using evidence-based arguments, reputable statistics and reports on the actual cost of city workers, and explaining to the public the alternatives to pension reforms (whether they be lost jobs or lower pay, etc.), other municipalities can succeed in reforming their own pension systems before they cause complete financial ruin.